U.S. economic growth downgraded ahead of "fiscal cliff"

NEW YORK Uncertainty about the "fiscal cliff" of scheduled tax increases and spending cuts prompted analysts this month to cut early 2013 U.S. economic growth expectations, a Reuters poll showed on Thursday.

It was the fourth month in a row they have cut forecasts for next year's first quarter.

Even with the worry, however, retail sales in the world's largest economy are expected to be nearly 4 percent higher than a year ago during the November-December holiday season. Payroll growth is also expected to pick up slightly.

The economy is expected to grow at a 1.6 percent annualized rate in the fourth quarter, according to the median forecast of over 60 economists polled by Reuters in Nov 9-15. That's down from the 1.8 percent in the October poll.

Expectations for the first three months of next year were cut for the fourth straight month, to 1.5 percent from 1.6 percent, though growth was seen picking up to 2.1 percent again by the second quarter.

For 2013 as a whole, economists expect a 2 percent rate of growth, much the same as this year.

"If not for the fiscal cliff, I think we'd probably be looking at GDP growth in the order of 3 or 3.5 percent next year," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida. He is expecting the economy to grow an annual 1.9 percent next year.

Unless U.S. lawmakers reach a deal, a $600 billion combination of tax increases and spending cuts will come into effect at the start of 2013, which economists fear could send a still-fragile economy back into recession.

Uncertainty over when and if an agreement will be struck is already weighing on economic projections for the new year with economists expecting businesses will continue to hold off on investment and hiring until there is clarity.

An acrimonious political debate could also sour consumer confidence, as was the case following 2011's last minute deal to raise the debt ceiling which led to the downgrade of U.S. debt.

"Brinkmanship on the fiscal cliff is likely to remain high," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

"The financial markets may be volatile and consumer and business confidence may fall. Business investment and consumer spending may pull back as a result."

Complicating the outlook further is economic damage from the massive storm that hit the U.S. East Coast, as well as the susceptibility of the economy to a downturn if the euro zone debt crisis worsens.

The impact of the storm could dampen growth this quarter, but economists expect activity should be made back up early next year. At minimum, superstorm Sandy is expected to add noise that could make it difficult to get a clear picture.

HOLIDAY RETAIL SALES BOOST AHEAD

While the prospect of a drawn-out political battle has already rattled business confidence, consumers' moods have so far been unaffected, with a measure of consumer sentiment recently rising to a more than five-year high.

"Most are unaware that they even had a tax cut the last couple years,(but) they probably will be aware when it goes away and the take-home pay goes down," said Raymond James' Brown.

October's drop in retail sales could be a hint that confidence was starting to waver, though purchases were also hurt by storm Sandy.

Americans were expected to open their wallets during the holiday shopping season, with retail sales in November and December forecast to be 3.9 percent stronger than last year, according to the poll.

Still, 25 out of 36 economists who responded to the additional questions on the holiday shopping season expected the fiscal cliff question to restrain spending.

Economists also noted the weak job market, and the repercussions from the East Coast storm as factors that could hold back holiday shopping.

The outlook for the labor market improved, with respondents expecting non-farm payrolls to grow by an average 144,000 a month in the fourth quarter, up from the 125,000 consensus forecast in October.

On a like-for-like basis, based on 21 common contributors in this poll and last, 16 upgraded their forecasts for jobs growth this quarter. That followed better than expected October data.

Hiring at the start of next year was seen slowing to an average 127,000 a month, before picking back up to 150,000 in the second quarter.

Expectations for inflation for 2012 held steady at 2.1 percent, while forecasts for next year were notched up to 2.1 percent from 2.0 percent in the last poll.

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